Mobile phone operators respond to the fear factor

I stared with increasing incredulity at the bizarre mop-headed creature cavorting, laptop in hand, across my TV screen, as he hunted for a wi-fi signal. You could tell his increasing desperation from the high-pitched squawks he was emitting.

Evidently, this European ad was suggesting the creature hadn’t bought a Vodafone broadband package. So, this was what global brand director David Wheldon meant by turning Vodafone into a “warm, cuddly” brand, was it?

The UK version of Vodafone’s “Power to You” repositioning – called Red Heads, and out later this month – may well have a less frivolous tone. Certainly the intention underlying it is deadly serious. Wheldon is, in effect, taking a huge risk with the brand. In trying to make it less stuffy and more youth-oriented, he is advancing frontally into terrain heavily fortified by his rivals O2, Orange and T-Mobile. At the same time, he risks alienating the very “dads” who are Vodafone’s major point of difference as a brand.

Vodafone is particularly strong in the B2B sector. Wheldon is not, so far as I know, a reckless man. He is taking risks because he has to. And he is not alone: his problems are common to the whole of the mobile operator sector. When we survey the flurry of recent activity in that sector – Vodafone’s launch of its 360 service, the strategic alliance between Orange and T-Mobile, the busting open of the iPhone exclusivity deal with O2 in favour of letting Orange and Vodafone into the charmed circle, and O2’s desperate attempt to counter its lost privileges with the solo launch of the Palm Pre – a pattern begins to emerge.

This has relatively little to do with oneupmanship in the battle for market share over Christmas 2009. It is much more important than that. It is a response to fear, the fear that all these highly-primed brands will lose out in the next evolutionary twist of convergence and dwindle into commodities. Basic phone and text tariffs are under unrelenting pressure, so the mobile operators need to extract added value elsewhere.

That “elsewhere” is to be found in data charges for allowing customers to surf the internet, to access their music, sync their contacts, play games, satnav their cars and so forth. In the past, the mobile operators have not been successful in mining this area, in part because of their greed but mostly because the technology didn’t work.

But now it does, thanks to the advent of a new generation of touchscreen smart phones. The iPhone has been the most iconic, but there are plenty of would-be “iPhone killers” in the pipeline.

And, from another part of the convergence sphere, there is also Google and its Android smart phone platform to consider. The danger in all this is that the mobile operators fail to act fast enough and are reduced to “dumb conduits” from which other, nimbler, players extract the marrow.

To take but one example, this certainly explains the logic of Vodafone’s 360 web-based services launch – and the more youthful, friendly tone of its message. The key element of 360 is an address book that integrates contacts on social network sites such as Facebook and instant messaging forums such as Google Talk. There are maps, music and an application store.

Vodafone has even tied up the launch with a special Samsung smart phone, out next month, which is wholly compatible with 360. Essentially it has created a next-generation loyalty device to woo customers into parting with more dosh.

Now I know what you’re going to say. We’ve heard all this stuff about a mobile technology inflection point being just over the horizon before and it’s always turned out to be a false dawn. But this time it’s different. No, really. Here’s Eric Schmidt, chief executive of Google, talking to the BBC a few of weeks ago:

“These new phones have so much power in them, so many activities, so much information, that they are the defining new category of our industry… We already make money from them through targeted advertising. In fact there’s evidence that advertising on mobile devices is even more profitable for us than on a PC; precisely because targeted ads are more valuable to advertisers.”

One reason for Schmidt’s confidence, which he does not mention here, is the rapid broadening of this smart phone market, as prices tumble. The price war is being led by a change of policy at Apple.

O2 is rightly considered to have executed a clever market-leading ploy by signing up the exclusive UK iPhone sales contract two years ago. However, despite the hefty contract fees, it would be a mistake to suppose the mobile operator has made much money directly out of the deal. In that time O2 sold about 1.7 million iPhones – roughly 5% of its total UK sales a year – and much of the money made will have been repatriated to Apple, under the agreement terms.

Now (presumably because Apple feels confident it can make more money out of “apps” in an open market) there will be an iPhone freefor- all, with all the mobile operators (bar 3) and more retailers vying for trade.

What was an expensive niche product is on the brink of becoming mainstream; and therein – according to Vodafone chief executive Vittorio Colao – resides a little gold mine. While only 10- 15% of Vodafone customers currently have smart phones, “we have 85% of the people who are not yet in the great world of data,” he says.

The logic of his arithmetic may be indisputable. But how much of this windfall will translate into profit for Vodafone and its like is more debatable. At the moment, it seems to me that Apple and Google are the ones winning the convergence war. An oblique but interesting insight into this is being provided by Sony, which is about to launch an iPhone/iPod lookalike version of its PlayStation Portable, PSPgo. Clearly Sony fears that games publishers are finding the relatively simple but evidently appealing Apple platform irresistible. Imitation, as they say, is the sincerest form of flattery.

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